Common Purposes
Personal loans are general-purpose loans. Typically, you can use the funds at your personal discretion, although some lenders may restrict the use of the money. Personal loans can often be more difficult to obtain than credit cards and sometimes come with their own set of rules.
Common Purposes
Since personal loans can be used for almost anything, there isn’t a single reason that drives consumers to seek them. Personal loans are commonly an option for purchases or other expenses that exceed the limit you can put on a credit card. Some common reasons include:
- Unexpected Expenses: A major home repair or the need to replace costly appliances like ovens can be tough on your credit card, and you might look for a personal loan to cover the cost. Healthcare expenses can be another unexpected cost that may require a personal loan.
- Major Events: You may want to pay for a significant event like a wedding but don’t have enough savings to do so. A personal loan can cover expenses that exceed your savings. Other major events that may warrant a personal loan include funerals or moving to a new place.
- Debt Consolidation: The money can be used to pay off credit cards or other debts. You will have only one monthly payment, and you may find that the interest rate on the loan is lower than the average interest rates of your other debts.
- College: A personal loan may have a better interest rate than a federal student loan, or your income may be too high to qualify for that loan. You may also use a personal loan to pay off your private student loans. However, personal loans do not come with the same officially recognized tax benefits as student loans. Check with a tax professional first to ensure you won’t be subject to taxes.
No Collateral
The loan is unsecured, meaning you don’t have to put up assets as collateral when you borrow. The lender cannot automatically take part of your property as payment if you default. This lack of equal collateral is one of the reasons why personal loans can be more difficult to obtain.
Fixed Amounts
Personal loan amounts typically range from $1,000 to $50,000, depending on the lender, your income, other debts, and your credit rating. The better your credit score and the higher your income, the more you can borrow.
Note: Most banks set limits on the amount you can borrow. For example, you may only be able to borrow a maximum of $10,000 even if you are a qualified borrower with excellent income if the lender’s policy is to not lend more than that.
You cannot borrow from the loan repeatedly as you can with a revolving credit card balance. Payments toward the loan reduce the balance but do not open up additional available credit that you can borrow again. The account is closed when you pay off the loan. You will need to reapply if you wish to borrow again.
Interest and Fees
The interest rate on a personal loan is usually fixed, meaning it does not change during the life of the loan. However, there may be some personal loans that have variable interest rates that change periodically. One downside to variable interest rates is that your payments can fluctuate as the interest rate changes, making it difficult to plan your loan payments.
Interest rates on loans are based on your credit score. Generally, the better your credit score, the lower the interest rates. In addition to charging interest, lenders will charge late fees if your payments are late. Many also charge an origination fee to set up the loan. These fees can range from about 1% to 6% of the amount you borrow, depending on your credit score.
Periods
Repayment
You will have a set period to repay the personal loan – usually 12, 24, 36, 48, or 60 months. Longer repayment periods reduce the monthly loan payments, but you will also pay more interest compared to a shorter repayment period. Additionally, the interest rate can be tied to your repayment period. Shorter repayment periods typically result in lower interest rates.
Having an open loan can affect your ability to get approved for other loans or credit cards in the future, so longer repayment periods may limit future credit options. Many personal loans also impose penalties for early repayment, so it’s best to choose the shortest repayment period you can afford.
How to Apply
It may be easier to obtain a personal loan from a bank or credit union you have a relationship with. The bank may want to know what you will use the money for and may even have a better loan that suits your needs.
Like any other loan, choose your loans wisely and borrow only what you can afford to repay. Take the time to calculate the monthly payments to ensure you can include those payments in your budget. Compare rates before settling on a lender. You may want to borrow less or give your credit score some time to improve if you are offered money at high interest rates.
Note: Loan details report to credit bureaus and become part of your credit report, like any other loan. Inquiries about your credit affect your credit score, as does making timely payments and reducing your loan balance.
Finding the Best Loan Rates and Terms
Many lenders offer personal loans, and the terms and conditions can vary significantly among them. Banks and credit unions tend to offer good rates, but some online lenders offer better terms even for those with very good credit scores. Online lenders can be more lenient with bad credit.
Avoiding Scams
Avoid loan scams, especially if you are looking for a lender to approve you because of bad credit history. Avoid any lender who guarantees approval without checking your credit or asks you to send money – especially via wire transfer or prepaid card – to secure the loan. You can always check with the Better Business Bureau or the consumer protection office if you’re uncertain.
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Source: https://www.thebalancemoney.com/know-about-personal-loans-960025
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